4 Things To Know About OCBC’s Offer For Great Eastern, And Why Things Could Be More Complicating Than It Seems

If you follow the news on the Singapore Exchange (SGX), you might have heard about OCBC’s ongoing $1.4 billion privatisation offer for all remaining shares of Great Eastern (SGX: G07). This offer values Great Eastern at $25.60 per share.

Understanding acquisition or privatisation offers for publicly listed companies isn’t too difficult for those with a basic knowledge of corporate finance or some experience in share investment. Typically, the acquiring company, known as the offeror, makes an offer at a premium to the last traded share price of the stock. This premium can be seen as a win for existing shareholders since they’re offered more than they would have received by selling their stocks on the exchange before the offer.

From an existing shareholder’s perspective, the options are relatively straightforward.

1. Sell the shares at the offer price to the offeror, which is higher than the previous trading price.
2. Choose not to sell the shares, risking holding onto shares of a company that may no longer be traded on the exchange if the privatisation goes through.

But is it always that straightforward? In this week’s edition of 4 Stocks This Week, we delve into four key aspects of OCBC’s offer for Great Eastern and explore why it might be more complex than it seems.

#1 OCBC Already Owns A Large Majority Of Great Eastern Shares

The first thing to note is that OCBC already owns most of Great Eastern (GE) shares. In fact, many OCBC bank customers already associate GE as the insurance arm of OCBC. The bigger surprise for some might be discovering that Great Eastern is actually a stock traded on the SGX.

Let’s take a quick look at the history. Prior to 2004, OCBC had a non-controlling stake of 48.8% in Great Eastern. However, a share exchange offer increased OCBC’s ownership to 81.1%, giving it a controlling stake (more than 50%). Another offer was made in 2006, further increasing OCBC’s ownership to 86.9%. You can read this Straits Times article for a more comprehensive understanding of this.

Since OCBC has owned an overwhelming majority of GE shares since 2006 and has made two offers for its shares in the past two decades, it’s clear that it values Great Eastern as an integral part of its group. OCBC has continued to increase its ownership in GE over the years by regularly buying more shares.

For example, as of 2 March 2009, OCBC owns 87.06% of GE shares.

Source: GE 2008 Annual Report

As of 29 February 2016, this has increased to 87.60%.

Source: GE 2015 Annual Report

As of 1 March 2023, this has increased to 87.91%

Source: GE 2022 Annual Report

As of 5 March 2024, this has increased to 88.45%

Source: GE 2023 Annual Report

The point here is that since it obtained more than 80% of GE shares in 2004, OCBC has consistently increased its interest in Great Eastern.

#2 At Least 10% Of Free Float Required

As of March 5, 2024, OCBC holds 88.45% of GE shares, leaving only 11.55% held by the public. This is close to the SGX minimum requirement, which mandates that at least 10% of the total issued shares must be held by the public. If the percentage of shares held by the public falls below 10%, the exchange may suspend trading of GE shares. 

Source: SGX

Such a suspension would be unfavourable for remaining investors, as it would halt share trading. Even if the public holding remains slightly above 10%, concerns may arise among shareholders about the proximity to the minimum threshold, potentially prompting some to sell their shares to avoid holding a stock that could be suspended from trading.

If trading is suspended due to not meeting the 10% free float requirement, remaining shareholders will find it difficult to sell their shares. This reduced liquidity could further depress the stock’s price.

This is perhaps why it makes sense that OCBC make its voluntary unconditional general offer to all other shareholders.

#3 The Rules Of Delisting

However, the rule for delisting a company isn’t as simple as buying up as many shares as possible, and in some cases, it can be quite complicated.

To apply to SGX for delisting, SGX Listing Rules stipulate that SGX may agree to a Voluntary Delisting if two conditions are met.

• the resolution to delist the issuer has been approved by at least 75% of the total number of issued shares held by independent shareholders (i.e. excluding the shares held by the offeror and parties acting in concert with it) present and voting; and
• a fair and reasonable exit offer, which includes a cash alternative as the default alternative, is offered to shareholders. The independent financial adviser appointed to advise on the exit offer must also opine that the exit offer is fair and reasonable.

Firstly, OCBC has: 1) owned more than 80% of GE shares since 2004, 2) made another offer in 2006, and 3) gradually accumulated more shares since then. As a result, there are fewer public shares available that are held by shareholders, excluding OCBC.

According to a Business Times article, when the offer was made, OCBC was deemed to own 88.67% of Great Eastern. Mathematically, to acquire at least 75% of the total number of issued shares held by independent shareholders, OCBC needs to acquire an additional 8.5% of shares, reaching a total shareholding of 97.17%.

Here are a few important points to consider if you are an existing GE shareholder:

• The same Business Times article also points out that two individual shareholders together hold about 3% of GE shares. If they choose not to sell, OCBC would find it difficult to reach the total shareholdings it needs
• The keyword here is “may”. That means there is no guarantee that delisting will happen. The shares may be suspended, but the company isn’t delisted.
• Under the compulsory acquisition framework in the Companies Act, if 90% of the company’s other shareholders who are unaffiliated with the buyer agree, the act allows for the compulsory acquisition of all remaining shares it does not own under the offer price. OCBC will need to own at least 98.87% (or 10.2% more shares) for this to happen.

A “fair and reasonable offer” is also required based on the Listing Rules. Unfortunately, this, too, has not been met since an independent financial adviser (IFA) assessed it to be “not fair but reasonable.”

OCBC’s point in this matter is that its offer price of $25.60 represents a “premium over the last traded price prior to the Announcement Date (“Last Traded Price”) (36.9%) and the volume weighted average price over the 1-month (38.6%), 3- month (40.0%), 6-month (41.9%) and 12-month (42.4%) periods up to and including 9 May 2024 which is the last trading date before the announcement of the Offer”. You can read their reply to questions posed to them by SIAS here.

We won’t comment on what we think a fair valuation should be, as we are not investment experts and there is plenty of content on this topic written by others. However, it is worth noting the following:

While OCBC cannot compel any remaining GE shareholders to sell unless it acquires an additional 10.2% of shares, the company’s shares could remain suspended or even be delisted in the future. This would significantly reduce liquidity and increase uncertainty for the remaining investors regarding the company’s future.

#4 OCBC Has Already Cross The 90% Threshold

In their response to SIAS questions on 27 June 2024, OCBC shared that as of 6 pm on 26 June 2024, OCBC had “received acceptances for 6,797,334 GE shares and acquired 1,762,100 GE shares through market purchases, and the interest of OCBC in GE is now 427,146,193 GE shares representing 90.24% of the issued GE shares.”

In other words, under SGX listing rules, if the free float falls below 10%, GE stocks are likely to be suspended from trading after OCBC’s offer closes on July 12.

OCBC could choose to sell GE stocks to meet the 10% free float requirement, but this would likely need to be at a discount to the offered price (otherwise, who would buy it?) and contrary to what they have been doing over the last two decades. If that happens, all existing shareholders, including OCBC, would be worse off. Existing shareholders could have sold at a higher price, while OCBC would have to release shares that they previously bought at a higher price.

Read Also: DBS (D05); UOB (U11); OCBC (O39): Singapore Banks Dividend Yield And Share Price Performance

4 Stocks This Week is not a recommendation from us to buy or sell any of these stocks. For investors who are keen to find out more, you should continue researching about them before making your investment decisions.

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